RISK MANAGEMENT: Securitisation Market's Steady Recovery
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CAPE TOWN- The South African securitisation market has seen a steady increase so far this year, in comparison to 2010. According to André Pottas, Debt Advisory leader at Deloitte for sub-Saharan Africa, while the market faces many challenges in the coming year, this recovery is likely to continue.
In the 12 months to May 2011, listed term securitisations rose to more than R12.5-billion. Moody’s data put listed term securitisations at R11-bilion last year, and R7.5-billion in 2009. The total market issuance of listed securitisation paper, which includes listed conduits, rose to R41-billion in the year to May 2011. Pottas says, “This indicates a decent recovery on the prior three years. However, we’re still behind 2007’s highs of R42-billion.”
Pottas, who is also chairperson of the South African Securitisation Forum (SASF), was a guest speaker at the IMN South African Capital Markets Summit held recently in Cape Town. The securitisation market in South Africa came under the spotlight at the conference, along with the outlook for debt capital funding in general.
The securitisation market suffered globally during the financial crisis in 2008. Mortgage-backed securities and similar instruments developed a poor reputation for playing a key part in the crisis at the time. Securitisation is essentially the issuance of tradable securities, backed by an asset’s income. It is a source of finance that usually comes at a lower rate than traditional term funding. Mortgage-backed securities are issued through a special purpose vehicle. This vehicle holds a portfolio of mortgages, usually based on their risk-level, which investors then invest in.
Pottas says, “The global securitisation industry is by no means out of the woods yet, and more work is needed to fully restore market confidence in securitisation as a genuine funding product.” As an example, the global issuance volumes fell to $92.1-billion in the first quarter of this year. That’s 1.5 percent lower than the same period in 2010.
He says the securitisation market’s recovery is also heavily dependent on the economic recovery. “Global expansion continuous, albeit sluggishly. But storm clouds have well and truly blown in, particularly with the ongoing crisis in Greece and Italy, and this is halting any European recovery for the moment. Of course problems in Europe spells challenges for our own recovery – and we are just starting to see the early signs of this.” He warns that South Africa’s economic growth is set to trail behind that of the rest of sub-Saharan Africa. The IMF has forecast SA economic growth at 3.5 percent this year, in comparison to 5.5 percent for sub-Saharan Africa.
Pottas also warns of regulatory challenges that may hamper the industry. “New challenges will present themselves in the coming year with uncertainty over the impacts of Basel III, the new Companies Act, and the new International Financial Reporting Standards. At Deloitte, and through our work at the SASF, we’re still investigating these, and addressing them accordingly.”
South Africa’s securitisation market is young when compared to those of developed economies. Securitisation started in America in the 1970s, but only really took hold in South Africa in 1999. According to the ratings agency, Fitch, the securitisation market here has matured through innovation and sophistication. Pottas says this helped ensure the South African market acted responsibly before the global financial crisis hit, thereby minimising the negative impact on the market.
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